Story Of The Week

100% FDI in E-Commerce: A Triumph or A New Legal Swamp

The Narendra Modi Government, on 29th of March, allowed 100 per cent Foreign Direct Investment (FDI) in “market-place model” of e-commerce retailing to magnetize foreign investment. To ensure clarity, the Department of Industrial policy and Promotion (DIPP) delineated the difference between the two market models in e-commerce i.e. the market-place model and the inventory-based model.

Different models: 

“Market-place model” of e-commerce means to act as a facilitator by providing an IT platform on a digital and electronic network between buyers and sellers. An e-commerce company merely acts as intermediary in this kind of model. While the “Inventory-based model” of e-commerce means an activity where inventory of goods and services are owned by the e-commerce entity and are sold to consumers directly. FDI has not been allowed in inventory-based model of e-commerce.

What has changed now:

DIPP mentioned in the press note that “E-commerce firms will not be allowed to sell more than 25 per cent of the sales through its marketplace from single vendor or their group companies”. With these guidelines, major players like Flipkart and Amazon India will be adversely affected. Flipkart’s WS retail and other large retailers on the platform generate more than 25 per cent of its sale. Cloudtail India, a joint undertaking between Amazon.com Inc. and N.R. Narayana Murthy’s Catamaran Ventures, is the key growth driver for Amazon India, generating at least 40 per cent of the company’s sales in the peak season. With new regulations, Amazon India and Flipkart along with other players may have to find new sellers on their platform. The new policy also mandates that e-commerce companies must display contact details of the sellers online. The warranty/guarantee of products sold online will also be borne by the sellers and not the e-commerce company.

Previously it was alleged that many market-place firms were breaching the market-place rule by selling a big chunk of goods through companies owned or controlled by them. When it came to their group firms, the e-commerce players could provide facilities which were not available to regular sellers. Till now, companies like Flipkart were following the market-place model that was not defined which bought many allegations by brick and mortar stores that e-commerce were flouting existing policies to gain unfair advantages by providing coupons and huge cash back to the customers. Amazon India used to indirectly pool discounts by sellers via “Promotional Funding”. Now with introduction of new policy, the discount given by these e-commerce companies will shrink and thus direct benefit to the consumers will dwindle. The new policy has levelled the field for both e commerce firms and brick & mortar stores to a large extent.

Pros and Cons:

This policy has led to the debate whether the current market dynamics will change by this move or not. Government has structured the foreign investment route in e-commerce and is continuing with the policy of not allowing e commerce firms to sell directly to consumers. This new move will help the bleeding e-commerce firms recover from piling losses due to the deep discount model they used to operate on till now. Eventually profitability will recover as heavy discounts end, and that should improve shareholder acuity about these companies, and subsequently improve valuations in long term.

Also the new policy will restrict the freedom of the e-commerce companies to offer deep discounts to buyers, and set a level playing field for offline retailers which previously found it difficult to match the predatory prices and offers given by online retailers. Offline retailers are happy as this new policy has curbed the pricing model of e-commerce companies. Investors who have not yet entered the Indian market from countries like Japan and China will be more attracted to invest in Indian E commerce firms due to the clarity on FDI policy provided by the government.

On the other hand, in the short-term, impact will be on the valuations of e-commerce companies which could shrink. That is because the firms will no longer be able to show huge growth in sales or revenues. Recently, Morgan Stanley marked down the value of its investment in Flipkart by 27 per cent.

What lies ahead: 

With this new policy note by DIPP, the Government is seen pushing the interests of the small seller and the job seeker in the country. It should also create a road map to the Goods and Services Tax (GST), which will make e-commerce to build up the supply chain efficiencies across the nation. The next funding round in e-commerce is supposed to happen in next two months. Experts believe it will be a war between Alibaba and Amazon. This new policy will also stir a transformation in the business model of the e commerce firms towards more sustainable model and focus on enhancing efficiency in the operations such as logistics, warehousing, order fulfilment, call centers and payment collection.

References

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